Despite an economic downturn as a result of the pandemic, money managers are committed to their long-term technology investment plans, migrating client and investment data to the cloud, enhancing remote work capabilities and automating more business operations for better efficiency, sources said.
While some firms have attempted to wring out savings by renegotiating contracts with third-party service providers offering investment market data, research and cloud-sourcing arrangements, most global money managers are ultimately spending more on technology as they strive to meet new remote work demands, said Tyler Cloherty, senior manager and head of the knowledge center for Casey Quirk, a practice of Deloitte Consulting LLP, New York.
“There’s been increased costs for laptops and collaborative software, like Zoom and Microsoft Teams,” Mr. Cloherty said. Additionally, costs have increased as money managers continue to make longer-term investments in migrating company data to the cloud and on research portals for investment team data sharing, he added.
“I think during the initial downturn in March and April, there was a hesitation to embark on substantial new investments. Since the market has bounced back … third-quarter margin numbers are going to look much better,” Mr. Cloherty said.
“Many firms were in a little bit of a holding pattern on (business) investments in the spring,” but now “firms are starting to return to their long-term structural spending agenda,” he noted.
At the end of 2019, annual technology costs were up 7% at global money managers, due to both increased head count and rising technology costs per employee, Casey Quirk found. On average, technology costs represent about 10.5% of overall operating expenses at money managers, and Casey Quirk foresees technology representing “a larger part of the overall cost structure of investment managers going forward,” Mr. Cloherty said.
Total technology spend across all global money managers was $51 billion last year, he added.
Currently, the largest technology investments being made by firms are in technology to migrate institutional client data and investment data to cloud servers, Mr. Cloherty said.
Greggory Warren, a Chicago-based financial services sector strategist at Morningstar Inc., said in an email that BlackRock Inc. and T. Rowe Price Group Inc. are leading the pack as far as their technology budgets compared to competitors.
They are “spending more on technology than their peers because they have the excess capital to do so, and everyone has had to pay out to accommodate work from home, likely putting off other initiatives to cover that cost,” Mr. Warren said in an email, noting also that “most of the publicly traded firms don’t reveal how much or what they spend on when investing in technology.”
New York-based BlackRock invests more than $1 a billion a year in technology and plans to continue “no matter the environment,” Robert Goldstein, senior managing director, chief operating officer and global head of the BlackRock solutions business, said during a Morgan Stanley conference in June.
“I’m very proud of saying that no matter the environment, the one thing you could count on at BlackRock is that every year, our investment in technology and data continues to increase in support of the importance of technology as the core DNA of how BlackRock operates itself,” Mr. Goldstein said at the conference.
BlackRock declined to comment for this story.
Baltimore-based T. Rowe Price is “not pausing or slowing down our technology investments as a result of COVID-19,” said a Sept. 30 company statement to Pensions & Investments.
T. Rowe, which breaks out “technology, occupancy and facility costs” as part of its operating expenses in quarterly earnings, saw costs in the category increase to $111 million in the second quarter, up 6.1% from the second quarter of 2019.
In total, the firm expects capital expenditures for 2020 to reach up to $225 million, with more than 75% planned for technology initiatives, T. Rowe’s second-quarter earnings release said.
In its statement to P&I, T. Rowe added: “We are in the fifth year of a longer-term strategy to modernize our technology. Our efforts are making T. Rowe Price more agile and secure and driving cost efficiencies. … While the pressures of the COVID response has meant that many of our associates and clients are not able to be in their normal workplace, our resolve to further develop our technological capabilities as part of the core of the firm’s business to enhance our abilities and sustain proven investment results continues. These efforts span nearly everything we do at T. Rowe Price, from investments to distribution and client-facing experiences to infrastructure.”
AllianceBernstein Holding LP, New York, plans to keep its investments in technology in 2020 largely in line with last year’s budget, according to Karl Sprules, head of global technology and operations.
“I would say the budget is probably pretty static (compared with 2019). I don’t imagine it will be up much or down much,” said Mr. Sprules, who is based in Nashville.
Mr. Sprules declined to provide AB’s technology budget, but the firm reported in its second-quarter earnings that general and administrative expenses, which includes technology spending, were $127 million during the three months ended June 30 and had increased slightly compared to the year-earlier period.
Chief Financial Officer John Weisenseel said during the firm’s latest earnings call that “second-quarter G&A increased 4% year-on-year, due to higher technology expenses related to our business initiatives, market data and occupancy expenses attributed to our headquarters relocation.” Mr. Sprules said the firm has saved by automating some of its investment operations, such as asset allocation changes and “pretty much any sort of long-running process that runs across departments,” for instance, from front office to back office.
Automation has freed up capital for AB to invest in the development of investment products and in-house technology tools, particularly those used to build and optimize fixed-income portfolios and source liquidity in the markets, Mr. Sprules said.
Money saved through automation has also been reallocated to support the firm’s return-to-office plans.
“By the middle of next year, we want to make sure we’ve thought about the desktop environment and how to make it as low touch as possible,” Mr. Sprules said. AB wants to provide employees a single device, rather than working on laptops, phones and iPads, for instance.
“We will give people a single device that will bring all of those things together that will limit the number of things they need to touch and we need to manage. It’s less footprint on many fronts, from a cybersecurity perspective, but also from a physical perspective,” Mr. Sprules said.
“We believe that we’ll need to have more flexibility in where (employees) want to work,” he added.
Catherine Seifert, a vice president and equity analyst at CFRA Research, New York, said that going into 2021, technology spending is going to depend on the health and needs of each money manager.
But firms will keep their tech budgets intact if they can, she added.
“If you are a firm and you’re seeing your AUM decline because of outflows, you’re going to be hard-pressed to spend your technology budget, but those are the firms that are going to need it more,” Ms. Seifert said.
A “lofty technology budget” can’t offset a poor mix of products, particularly for struggling active managers that have not diversified to offer passive, ESG or other investment strategies that are attracting assets from investors, she continued.
“I do think the asset management industry is becoming a very bifurcated industry because of the pressures it’s facing. In the aggregate, tech spending is likely to be an area where companies will allocate as best they can,” Ms. Seifert said.